In most states the 2010 legislative sessions were unusually quiet because of midterm elections and the antitax political environment. Even California, which under normal circumstances would have had a busy year for tax legislation, was relatively slow given its dire fiscal circumstance. Short of a federal bailout of state and local governments, mounting budget demands will put incredible political and economic pressure on state policymakers as the 2011 budget discussions take shape. The backdrop of record-breaking budget deficits1 — set in an antitax environment — is sure to create political gridlock in some states, while others fight over whether to dramatically raise taxes or cut spending. Either way, 2011 is shaping up to be a state tax policy donnybrook and many are asking, ‘‘How can you have any pudding if you don’t eat yer meat?’’2 In this column, we examine how the confluence of the budget crises and Republicans’ political gains may affect state tax policy. In particular, we will address how various substantive state tax areas may be affected by the current political and economic realties.

At the risk of sounding like a broken record, many of the issues discussed in our 2010 legislative outlook Pinch of SALT3 will continue to be on the front burner in 2011. Of particular note, we expect to see significant sales and use tax nexus legislation (such as click-through nexus, adoption of Colorado-type reporting regimes, and streamlined sales tax conformity legislation); sales and use tax base expansion (particularly attempts to tax digital goods and services); a possibly short-term love affair with combined reporting; and a possible trend toward changing the Uniform Division of Income for Tax Purposes Act’s income tax sourcing and apportionment rules.

2010 Midterm Elections: The GOP Strikes

The GOP made widespread gains in the 2010 state elections.4 Republicans won 23 of the 37 gubernatorial elections. All six Republican incumbents who were up for reelection won their races, and two more Republicans defeated Democratic incumbents. In addition to gubernatorial wins, Republicans made significant gains in state legislative chambers, winning control of both sides in 25 states and splitting control in seven more.5 For example, Republicans gained control in both chambers of state legislatures in Alabama, Maine, Minnesota, New Hampshire, North Carolina, and Wisconsin. The GOP gained control of the state house of representatives in Colorado, Indiana, Michigan, Montana, Ohio, and Pennsylvania.6 As a result of these gains by the GOP, there is both a Republican governor and Republican control of the legislature in the following 20 states: Alabama, Arizona, Florida, Georgia, Idaho, Indiana, Kansas, Maine, Michigan, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Wisconsin, and Wyoming.7